Posts Tagged ‘Luddite’

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“Give me a place to stand, and I shall move the world,” or so said Archimedes – supposedly. He was expounding upon the benefits of levers. A small action can lead to a massive reaction, if the picots and levers are right. It is like that with the economy too, although economists often fail to grasp this point – which is why so few predicted the crisis of 2008. But it can work the other way too; a few small changes can have a radical upwards effect. Neither economists nor the markets realise how dramatic the economic impact might be.

The dangers of a housing bubble have been outlined many, many times. The point those who dismiss such dangers are not getting is the British psychology. It is as if the British DNA has been hardwired to expect house prices to rise, and to be in permanent fear of missing out on the opportunity to jump on or climb up the housing ladder. In the long run, this expectation may prove wrong; indeed the very idea that there is such a thing as a housing ladder may be wrong. But expectations are such that it takes very little government interference to create a housing boom. And because of the way UK households see the value of their homes as a kind of extension of their salary, or as the main part of their pension, when house prices rise consumer demand rises and with it GDP.

But this is not the reason why it is being suggested here that that the UK economy may be set to boom – although it will help.

Bear in mind that the UK economy today is around 15 per cent smaller than if it had carried on growing at the pre-2008 trajectory. Squint a bit, look at the data through glasses that may be a touch tinted by roses, and could it not be said that the UK economy has room for a period of catch-up. Let’s say it will take five years before the UK gets back to where it would have been had the pre-2008 growth rate continued. Let’s say the underlying growth rate for the UK is 2.5 per cent. This means that growth over the next five years will be around 5.5 per cent a year.

That is crazy, you might say. Well maybe a growth rate like that is crazy, but it might happen all the same.

Take corporate cash. According to Capita Registrars, no less than £166 billion in cash sits on corporate balance sheets. Since 2008 cash minus short-term debt has risen from £12.2 billion to £73.9 billion.

If you want to know why the downturn has been so severe, the above numbers give the reason. Just imagine the economic implications, not to mention the implications for equity values, if some of this money was released to fund investment, higher dividends, and mergers and acquisitions.

The reality though, is that this is understating what might happen. When you think about it, the build-up of this cash mountain at a time when interest rates were at record lows was extraordinary.

If the corporate world was to start thinking that economic growth is set to accelerate, it won’t just start spending its cash, it will engage in leverage to make Archimedes’ ideas for moving the earth look quite modest.

Now consider what the surveys are saying. The latest composite Purchasing Managers’ Index from Markit/CIPS covering August hit its highest level since record began in 1998. According to Markit, the survey pointed to quarter on quarter growth of between 1 and 1.3 per cent – so you see a year on year growth of 5.5 per cent is not that far off what the surveys are suggesting may be happening already.

Interest rates are set to rise. The time to engage in leverage is now, before rates rise too high. And engage in leverage is what companies will do. The Vodafone Verizon deal is just the beginning.

Will we see a bubble? Will it be too good to last? Maybe. But the Institute of Economic Affairs is taking the opposite approach; it is saying that from now on the UK’s sustainable growth rate will be a mere 1 per cent year.

What the pessimists overlook, and they are being led by an economist called Robert Gordon, is technology. If you shop in Luddites‘r’us, you may well conclude such predictions are absurd.

© Investment & Business News 2013

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The Luddites were sometimes right. Technology might be a good thing in the long run, but in the short run there are casualties. Actually, there are always casualties, but it’s possible that innovation has sometimes created economic depression before it created something special. It may be like that today, and 3D printing is a prime example.

Consider the age of symmetry. It lasted from around 1867 to 1914, and was perhaps the golden age of innovation. In fact, if you look at the history of innovation from learning how to tame animals to the Internet, it is possible that more innovation occurred in that half a century or so than throughout the rest of history put together. Yet 13 years later, the US entered the Great Depression, and the global economy limped forward into world war. It may have been a coincidence of course, but then again, does it not kind of make sense that innovation can create economic hardship?

Innovation can increase productive potential, but without a corresponding rise in demand the result of innovation may be fewer jobs. Fewer jobs mean less demand and things can become worse.

This does not mean innovation is bad and always destroys jobs; it just means that it can, under certain circumstances, particularly if the government does not try to counteract the negative impacts of innovation with stimulus. Maybe this has been happening of late. It does feel as though modern technology has left two types of jobs: the highly paid skilled jobs, and the manual jobs, such as cleaning. There is little in the middle.

And that brings us to the next wave of innovation: nanotechnology to the internet of things, might not these changes cut though the economy like a sickle though grass?

Take 3D printing: it’s hard to see how this can do anything but destroy jobs. It is hard to see this, but not impossible.

3D printing may provide the opportunity for local craftsman, experts in CAD, design, and materials to provide bespoke products for the customer, at a price that puts such products in reach of the mass market.

A similar point was made here the other day. See 3D printing: game changer or just fair game for the cynics? 
It was good to see others drawing similar conclusions. Kevin O’Marah of SCM World recently wrote “Store-based retail is getting killed by Amazon-addicted consumers whose loyalty is paper thin. Suppose, however, that stores did more than just carry product.

Additive manufacturing (aka 3D printing) has the potential to custom-make many consumer products given progress in the materials sciences that will go from simple resins to metals, ceramics, fabrics and more. Add some well-trained staff and the store could be a place where consumers come to solve problems and experiment with ideas. Imagine the retailer REI deploying these ideas for its ultra-loyal outdoorsy customer base – it’s not hard to see how this beats Amazon.” See Futureworld: 3D printing is the tip of the iceberg 

Maybe 3D printing won’t just have one effect, but will have different effects at different times, and in different sectors. It may lead to job losses and a recession for a while and in some regions, but it may also ultimately create a huge number of skilled and well-paid jobs, creating more wealth for most of us.

© Investment & Business News 2013